Between 2011 and 2015, the Irish government must make £8.5 billion of spending cuts and collect an additional £4.2 billion in taxation with an austerity programme that will bring Ireland's generous welfare state to an end.

There was more bad news for Ireland this morning after Standard & Poor cuts its debt rating two points as contagion threatens to spread through the rest of the euro region.

The EU has warned the fragile Irish government that it must find savings worth £5 billion next year, in what is expected to be a deeply controversial 2011 budget to be unveiled on December 7.

EU and IMF officials will police the plan and Ireland has been warned that if targets are not met then euro zone loans, totalling £72billion over three years, will be withheld until tax increases and spending cuts are ratcheted up.

Middle class Irish families face the loss of tax credits and low paid workers, totalling 50 per cent of the labour force, will start to pay taxes for the first time.

The current entrance level for income tax is £15,506 for a single person and £27,071 for a married couple with children, thresholds that will rise over the next four years.

Ireland's minimum wage is to be cut 13 per cent and all Irish households face a new £257 property tax from 2012. Welfare payments, including jobseekers allowance and child benefit, will be cut five per cent or £2.5 billion.

Breaking a previous agreement with Irish trade unions, the public sector payroll will be cut by £847 million with 27,000 civil service jobs lost.

”It appears that the day of reckoning has arrived,” said David Begg, head of the Irish Congress of Trade Unions. “The Barbarians are at the gates.”

In a bid to preserve Ireland's low corporate tax rate, new bank levies will be proposed as an alternative to ward off pressure from France and Germany to increase Irish capital gains taxation from 12.5 per cent.

The low corporate tax rate, compared to 34 per cent in France and 30 in Germany, is regarded as a red line and Ireland's best hope for quick growth by the Irish government.

Alongside the austerity programme and as the EU bailout is signed off the Irish government will quickly move to take over Allied Irish Banks and the Bank of Ireland.

The EU is worried over the fate of £111 billion of European Central Bank reserves pumped into the Irish banking sector to keep it afloat.

Plunging shares and a capital flight will force government next month intervention, with £5.2 billion in cash from first instalment of EU bailout put into both AIB and BOI.

Both banks were the first to meet the EU-IMF team of inspectors as they arrived in Dublin last Friday.

Up to £43billion of the EU bailout has been set aside to shore up banks which will be required to keep a capital ratio at 10.5 per cent.

Wolfgang Schaeuble, the German finance minister, warned that Ireland must pass and stick to its austerity programme or put the euro at risk.

”The uncertainty puts the future of our currency at stake,” he said. “If we cannot defend our common currency as a sustainably stable currency the consequences would be incalculable.”

But political uncertainty continues to surround the spending cuts and tax rises as Irish opposition refuse to pledge support to next year's critical budget.

Despite the fizzling out of a Fianna Fail rebellion against Brian Cowen, the Irish Prime Minister, because of mounting bad news about extant of banking crisis, his government majority will be lost after a by-election in Donegal tomorrow.

Olli Rehn, the EU's economic and monetary affairs commissioner, said the cuts were “essential” that Ireland should bite the bullet.